Barriers to Entry

At lunch the other day I overheard two guys talking about “creating barriers to entry” in enthusiastic tones, from their conversation I gathered they’re in the telcom industry and looking at phone applications. What they were actually referring to, without going into detail, was a first mover advantage.

They’re not really in a position to create any barriers to entry, and software development is one area where it is difficult to create a real barrier to entry unless you can reach a critical mass of users when a network effect kicks in. With the increasing interoperability of software, increasing use of open source software and the move to web services even this is being eroded.

“Barriers to entry” are defined as conditions that make it difficult in a given industry for new competitors to enter the market.

Some barriers are naturally existing in a mature market where resources may be controlled, some occur through government legislation and some are created by companies already in the market to exclude newcomers.

In more detail;

Naturally occurring

  • intellectual property
    -examples; pharmaceuticals, coca-cola
  • investment requirement
    -examples; large construction companies, heavy industry, pharmaceuticals, oil exploration

In a mature market

  • resource control
    -examples; oil exploration,
  • customer loyalty/customer switching costs
    -examples; banks, telephone companies, energy supply companies
  • economy of scale
    -examples; manufacturing, insurance
  • network effect
    -examples; software, social media web services, stockmarkets
Picture 7

Barriers to entry make starting in an industry more difficult

Government legislation/authority controlled

  • control of resource
    -oil, coal, salt, private-public partnerships for services such as jails.
  • licensing requirements
    -examples; professions such as doctors, telcom operators, bars/restaurants
  • restrictive practices
    -examples; landing slots at airports

Company controlled

  • advertising
    -examples; big spend advertising/marketing by an incumbent could make it difficult for new entrants to attract sales
  • predatory pricing
    -examples; a French court found that Amazon.com was in breach of their antitrust laws in their offer of free shipping
  • vertical integration
    -examples; oil industry, American Apparel, supermarkets who adopt an own brand strategy

image from RachelH via flickr

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